2015 COST ESTIMATES OF ESTABLISHING AND PRODUCING SPECIALTY CIDER APPLES IN CENTRAL WASHINGTON

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1 2015 COST ESTIMATES OF ESTABLISHING AND PRODUCING SPECIALTY CIDER APPLES IN CENTRAL WASHINGTON By Suzette P. Galinato, Research Associate, IMPACT Center, School of Economic Sciences, Washington State University, Pullman, WA. Carol A. Miles, Professor and Vegetable Extension Specialist, Department of Horticulture, WSU Mount Vernon Northwestern Research and Extension Center, Mount Vernon, WA TB35 Page 1 ext.wsu.edu TB35

2 2015 Cost Estimates of Establishing and Producing Specialty Cider Apples in Central Washington Preface Cider is fermented apple juice and is often called hard cider in the US. However, worldwide, the term cider is used most often to describe this fermented beverage and will also be the term used throughout this publication. The results presented in this publication serve as a general guide for evaluating the economic feasibility of producing cider apples in central Washington as of This publication is not intended to be a definitive guide to production practices, but it is helpful in estimating the physical and financial requirements of comparable plantings. Specific budget assumptions were adopted for this study, but these assumptions may not fit every situation since production costs and returns vary across orchard operations depending on the following factors: Capital, labor, and natural resources Crop yield Cultural practices Input prices Orchard size Cider apple prices Management skills Type and size of machinery and irrigation system Cost estimations in the enterprise budget also vary depending on the budget s intended use. To avoid unwarranted conclusions for any particular orchard, readers must closely examine the assumptions made in this publication, and then adjust the costs, returns, or both as appropriate for their operation. Cider Apple Production in Washington State Cider apples can be produced with fewer pesticide inputs than dessert apples since minor surface blemishes are tolerated if yield and internal fruit quality are not compromised (Peck and Merwin 2008). Cider apples are grown throughout Washington. There were an estimated 204 acres of cider apples produced in Washington State in 2010 and 256 acres in 2011 (Northwest Agriculture Business Center 2013). The top cider apple varieties grown in the state are Ashmead s Kernel, Brown Snout, Dabinett, Frequin Rouge, Harrison, Hewes Virginia Crab, Kingston Black, and Yarlington Mill (Miles et al. 2015). Examples of cider apple varieties that are grown in TB35 Page 2 ext.wsu.edu central Washington include some of the aforementioned varieties as well as Foxwhelp and Porter s Perfection (Table 1). Study Objectives According to the Alcohol and Tobacco Tax and Trade Bureau (various years), the production of cider in Washington State on which taxes were paid was approximately 56,600 gallons in 2008 and had risen to over 853,900 gallons by 2015 a 15fold increase in 7 years and a 48% growth rate per year on average. As the production of cider continues to rapidly expand, the demand for specialty cider apples is expected to increase (Merwin et al. 2008). As such, growers will need reliable and objective information on the costs of establishing and producing apples for cider. This publication enables growers to estimate (1) the costs of equipment, materials, supplies, and labor required to establish and produce cider apples in central Washington, and (2) the ranges of price and yield at which cider apple production would be a profitable enterprise. The primary use of this publication is in identifying inputs, costs, and yields considered to be typical of well-managed cider apple orchards in central Washington. This publication does not necessarily represent any particular orchard operation and is not intended to be a definitive guide to production practices. However, it does describe current industry trends and can be helpful in estimating the physical and financial requirements associated with establishing a profitable cider apple-producing operation. Sources of Information The data used in this study were gathered from two commercial apple growers, each with about 8 years of experience growing cider apples, and acres of diverse cider apple cultivars in central Washington (Figure 1). Both growers are still experimenting and fine tuning their planting of cider apples; hence, there is no particular cultivar or mix of cultivars that can be definitely recommended for the region at the time of this study. The production practices and input requirements of the participating producers form the baseline assumptions that are used to develop this enterprise budget. In Table 1, examples of cider apple cultivars that can be produced in central Washington are listed. The production costs and returns presented in the enterprise budget is an average for the different cider apple cultivars planted.

3 Figure 1. A new cider orchard (left) and an established cider orchard (right) in central Washington. The data provided represent the crop yield and application rates of inputs that these producers anticipate over a cider apple orchard s life based on the established assumptions and if no unforeseen failures occur. Given that many factors affect cider apple production costs and returns, individual producers are encouraged to use the Excel Workbook provided to estimate their own costs and returns. Budget Assumptions 7. Post-production costs, such as extended storage, juicing, and transportation to a cidery are not included in this budget. 8. Interest on investment is 5%. Five percent is the median of the range of the average annual effective interest rates on non-real estate bank loans made to farmers from 2010 to 2015 (Federal Reserve Bank of Kansas City 2016). Summary of Results 1. The area of the total farm operation is 100 acres of mixed fruit trees. Bearing acres include: 75 acres of apples (75% of total area), 16 acres of sweet cherries (16%), and 9 acres of pears (9%). 2. The budget is based on an 11-acre cider apple block within the 100-acre farm operation. It is assumed that 1 acre of this block is dedicated to roads, a pond, loading area, buildings, etc., rather than to fruit production. Therefore, the total productive area for this block is 10 acres. Table 1 shows the assumed cider apple block specifications. 3. The total value of bare agricultural land (including water rights) is $12,000 per acre with annual property taxes of $120 per acre. 4. The irrigation infrastructure is a dual system: drip system and sprinkler system (mainly for the ground cover). Water is provided through a public irrigation district. 5. Cultural practices and harvest activities are done by hand and using ladders (no mechanical aids). 6. Management is valued at $300 per acre by a foreman or head supervisor (applied to the entire 100-acre farm). This value represents a fair return to producer s management skills based on the interviewed producers. TB35 Page 3 ext.wsu.edu Table 2 shows the estimated annual cost and returns for growing cider apples in central Washington. The components of the major costs shown in these tables are provided in more detail in the Excel Workbook discussed in the next section. Production costs are classified into variable costs and fixed costs. Variable costs comprise orchard operations, harvest activities, material and application costs, and maintenance and repairs. Fixed costs are incurred whether or not apples are produced. These costs will generally be calculated for the whole farm enterprise and allocated across each unit of production. The fixed costs include depreciation on capital, interest, taxes, insurance, management, and amortized establishment costs. Management is treated as a fixed rather than a variable cost because, like land, management has been committed to the production cycle of the crop. This study assumes that cider apple trees achieve full production in their sixth year. Based on the given assumptions, the total production costs for cider apples during full production are estimated at $11,941 per acre. The estimated net returns (shown in Table 2) represent what a producer may earn from investment in land and management after all costs are subtracted, including labor the producer contributed

4 to crop production. The breakeven price for cider apples during full production is about $239 per 900 lb bin (or $0.27/lb) given a yield of 50 bins (45,000 lb) per acre. Crop yield and prices can vary from year to year. Therefore, to be of use to potential investors, the assumptions underlying the estimates in this enterprise budget should be carefully examined. This study assumed a production level of 50 bins per acre during the full production years (that is, years 6 to 30). This level of production is what experienced cider apple growers estimate to be an average over the remaining years that the orchard is in full production given the study s assumed production specifications and given annual crop yield variability (i.e., due to biennial bearing, extreme temperatures, and pest infestation, among others). To further help users evaluate potential production scenarios, Table 3 illustrates likely per-acre net returns for a fully established orchard given different price and yield levels. Most of the budget values given in Table 2 are based on more comprehensive underlying cost data, which are shown in Tables 4 through 7. Table 4 presents the annual capital requirements for a 10-acre cider apple block. Table 5 specifies the machinery and building requirements for the 100-acre diverse cultivar orchard. Interest costs and depreciation are listed in Tables 6 and 7, respectively. Interest costs represent required return on investments. They can be actual interest payments on funds borrowed to finance farm operations and physical capital investments, an opportunity cost (a return that would have been received if the investment had been in an alternative activity), or a combination of the two. All interest and amortization costs assume a 5% interest rate. The amortized establishment costs assume a total productive life of 30 years, which includes 5 years of establishment and 25 years of full production. The amortized establishment costs must be recaptured during the full production years in order for an enterprise to be profitable. Depreciation costs are annual, non-cash expenses that are calculated over the asset s useful life. These expenses represent the loss in an asset s value due to use, age, and obsolescence. The economic feasibility of investing in a cider apple orchard is further assessed by using the net present value (NPV) and discounted payback period. NPV is the sum of the discounted cash flows from the first year to the last year of the planting s productive life (i.e., 30 years). NPV provides an indicator of an investment s feasibility by estimating and converting its future profits into present-day dollars given the cost and length of the investment, time value of money, and how long it takes for an investment to return a profit. The discounted payback period TB35 Page 4 ext.wsu.edu gives the number of years it would take to recoup an investment from discounted cash flows. Discounting is a method to estimate the present value of future payments. A discount rate of 5% is used in the calculation of NPV and payback periods, and represents the opportunity cost of capital. Assuming a price of $315 per 900 lb bin ($0.35/lb) and a discount rate of 5%, the NPV of the investment or expected profits (in present-day dollars) over the lifetime of the cider apple orchard is $0.49 million (Table 8). The estimated discounted payback period for the orchard investment can vary depending on the costs included in the calculation, and ranges from 6.7 to 11.9 years. If one includes total cash costs (which is the sum of total variable costs, miscellaneous supplies, land and property taxes, and farm insurance), the discounted payback period is 6.7 years. Whereas, if one includes all production costs (which is the sum of total cash costs, management costs, and fixed capital investment), the discounted payback period is 11.9 years. Table 8 also shows the sensitivity of the NPV calculations to different discount rates 3% through 9%. The range of the average annual effective interest rates on non-real estate bank loans made to farmers in the past 6 years (2010 to 2015) is between 4% and 6% according to the Federal Reserve Bank of Kansas City (2016). Alternative discount rates are included to demonstrate the value of better (or worse) investments or possible impacts of inflation. The NPV and payback period calculations can be found in Appendix 6 of the Excel Workbook. The key results of these enterprise budgets are based on production-related assumptions established for the study. Production costs and returns for individual growers may differ, thus the results cannot be generalized to represent the entire population of growers. An interactive Excel Workbook is provided to enable individual growers to estimate their returns based on the costs of their production. Excel Workbook An Excel spreadsheet version of this enterprise budget (Table 2), as well as associated data underlying the per-acre cost calculations (Tables 5 through 7 and Appendices 1 through 6 for establishment costs, full production costs, calculation of salvage value and depreciation costs, amortization calculator, production-related data, and NPV and payback period calculators) are available at the WSU School of Economic Sciences Extension website. Growers can modify select values and thus use the Excel Workbook to evaluate their own production costs and returns.

5 Additional Cider Research Information WSU Mount Vernon Northwestern Washington Research and Extension Center (NWREC) is actively investigating cider apple production and mechanical harvest. The new cider research orchard at WSU NWREC includes 60 specialty cider apple varieties (Figure 2). More information about cider research at WSU and in the US can be found on the WSU Hard Cider website. Acknowledgements The authors wish to thank the Northwest Cider Association and WSDA Specialty Crop Block Grant Program (grant number K 1270) for funding this study, and the WSU Extension publication reviewers for their helpful comments. The assistance provided by cider apple growers in developing the enterprise budget is also greatly appreciated. References Alcohol and Tobacco Tax and Trade Bureau (TTB). Various years. Cider statistics CY TTB, Washington, D.C. Federal Reserve Bank of Kansas City Agricultural Finance Databook: Tables. Merwin, I.A., S. Valois, and O. Padilla-Zakour Cider Apples and Cider-Making Techniques in Europe and North America. HortReviews 34: Miles, C.A., J. King, and G. Peck Commonly Grown Cider Apple Cultivars in the U.S. Cider Report 202. Washington State University Mount Vernon Northwestern Washington Research and Extension Center, Mount Vernon, WA. Figure 2. The new cider experimental orchard at WSU Mount Vernon NWREC. Northwest Agriculture Business Center Informal survey. Peck, G.M., and I.A. Merwin Organic and Integrated Fruit Production Systems for the Northeastern US (Abstract). HortScience 43(4): TB35 Page 5 ext.wsu.edu

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10 Copyright 2017 Washington State University WSU Extension bulletins contain material written and produced for public distribution. Alternate formats of our educational materials are available upon request for persons with disabilities. Please contact Washington State University Extension for more information. Issued by Washington State University Extension and the U.S. Department of Agriculture in furtherance of the Acts of May 8 and June 30, Extension programs and policies are consistent with federal and state laws and regulations on nondiscrimination regarding race, sex, religion, age, color, creed, and national or ethnic origin; physical, mental, or sensory disability; marital status or sexual orientation; and status as a Vietnam-era or disabled veteran. Evidence of noncompliance may be reported through your local WSU Extension office. Trade names have been used to simplify information; no endorsement is intended. Published November Revised January TB35 Page 10 ext.wsu.edu